Campaigning to Resume: The State of the Parties

Today UKIP will launch its manifesto for the upcoming general election, and the party's implausible leader will have considerable media coverage: much of it unfavourable. Then UKIP will sink to a low rating in the opinion polls, with no prospect of being represented in the House of Commons.

The other parties will re-start their campaigns tomorrow, though local leafleting will resume in some areas today.

In the limited time on the media that has been allocated to Jeremy Corbyn in the past two days, he has spoken sensitively and sensibly about the Manchester tragedy. Labour has certainly not lost ground during the shut-down of the campaign.

Mrs May has had a big opportunity to appear to be 'prime ministerial', and has not overplayed her part. However, her campaign was faltering before the suicide bomber shut down partisan discussion, and the Prime Minister can have had little time to review the mess that she had made for herself, particularly on the costing of social care and how that bill is to be met. Like all Conservatives, Mrs May has the dilemma that the policies pursued by her party - in power for the best part of seven years - has largely stifled real economic growth. A government that is hemmed in by obsessions with austerity and the [probably notional] elimination of the deficit on state spending can only contemplate shifting some fragment of the already-existing national wealth into the state budget to meet the cost. Thus people are being asked to accept that the inflated 'value' of their homes can be raided to meet the costs of their personal care, at need.

One significant aspect of the situation is that the management of social care lies with local authorities. Therefore local authorities, whose budgets have been squeezed very hard by the Osborne-Hammond policy of cuts, are to be expected to create mechanisms for valuing property, and further mechanisms for funding the care of property-owners [whether in care homes or at home] over periods of several years until the supposed 'value' of the property is realised in a sale. To maintain the 'value' of the property, it has to be maintained properly: which is a further element of cost that the local authority will have to meet. The implication is that local authorities will have to become massive borrowers: if anyone will lend them the money.

The segment of the massive complex of financial markets that led to the crisis of 2007-8 was the exposure of 'sub-prime mortgages' in the USA. Financial institutions were bullied by the Clinton regime into allowing people with no successful record of paying their bills, often with no secure employment, to buy houses on mortgage. When economic conditions tightened, in 2005-6, thousands of people simply handed the keys to their properties to the lenders and drove away. The 'value' of those houses in the books of the lenders - who had now become, will-nilly the owners - were the prices at which they had been bought. They could not be sold on for the same prices, as thousands of such houses were dumped on the market at once.

Thus one can expect lending institutions to be very cautious of advancing large sums against properties whose 'value' will be incalculable on the unforeseeable future dates when they will be available to be sold. If the government becomes the lender, or the guarantor, of the loans that local authorities will need to fund the care that has to be given to the owners of the properties that will be drawn into the scheme on the death of the owners - or of their partners [who may, obviously, also need years of care in the further future] - that guarantee must be added to the national debt: which obviously blows away any hope of reducing or eliminating the the deficit. The more this question is emphasised in the last fortnight of the election campaign, it will be clear that the Tories' plans are no more 'affordable' than are Labour's.

At the least, Labour is claiming that their plan, especially borrowing to fund infrastructure investment, will stimulate growth of the material economy. Mrs May offers no such prospect.

What the Fed is Doing

The Federal Reserve Board, the central bank of the USA, has announced that it will continue on a large scale to buy 'mortgage-backed securities'. A security is a promise-to-pay that has been issued by a firm or a government agency, that is considered to be highly likely to be cashed [or exchanged for another acceptable asset] when the owner demands payment in accordance with the terms on which the security was created. By concentrating primarily [though not necessarily exclusively] on mortgage-backed securities the Fed is slowly capturing the reckless expansion of credit during the nineteen-nineties and twenty-naughties, when the spending-power that was created was used to 'buy' houses. Hundreds of thousands of Americans were encouraged to participate in Bill Clinton's concept of a property-owning democracy by taking a material stake in the country - and gaining a material asset - through house purchase. Lending institutions, mutual funds and banks, were bullied by the agencies of federal government into making mortgage loans, even to people whose incomes and history of indebtedness indicated that they were incapable of resourcing and managing the repayments.

Notionally the books balanced. The population collectively borrowed more money each month to buy an increasing housing stock, comprised of properties whose resale prices were increasing in line with the rising price of new homes. The public's debt to the banks notionally matched the liability of the banks in the form of the sums that they owed to the investors who had supplied them with the credit that they had advanced as mortgages. Month by month the vast majority of mortgaged householders paid the sums due to their mortgage lenders. The lenders used the inward cash flow to pay their business costs and to pay the interest that was due on the credit that they had borrowed, and to repay those creditors and depositors who asked for their money back: and they had enough left to carry on lending to more borrowers at higher prices. Then during 2006 economic conditions became tougher for low income groups. Unemployment and prices were increasing, and an increasing number of 'sub-prime' borrowers either surrendered their properties or were evicted from them as their arrears on mortgage payments were deemed intolerable by the lending institutions. The mortgages had partially been funded by sales of securities that were 'bundled' with other mortgage lenders' debts and with the ownership of loans that had been made for other things. These 'complex' securities  were said to be 'safe'  because they would not lose more than a fraction of their value if any one of the lending institutions became unable to pay out against the security on demand. During 2007, however, it became clear that several major mortgage lenders had so large an exposure to sub-prime mortgages that there could no longer be a guarantee of the value of the securities that they had issued; and it was unclear, in the case of many complex securities, how much of the asset had been eroded because it was not clear how much of the asset was devalued. So the only way to treat such a security was to assume that it had no determinable value. This caused the catastrophic collapse of banking confidence and of asset values generally that was quickly dubbed the 'credit crunch' and which spread around the world.

A variety of headline-grabbing measures was taken by governments and by central banks both to calm down the markets and to prop up the values of as many shares and securities as could still be seen to retain positive value. The banks were enabled to carry on allowing customers to access their own money, and to service those of their debts that it was necessary to pay off. Where it was deemed necessary the government took partial or even total ownership of the banks; though the most preferred method was to 're-capitalise' the banks by topping up the cash that they had available so that they could continue to met their obligations.

Though house prices fell significantly, valuations were still quoted and contracts for house purchase continued to be made; and the vast majority of mortgage holders carried on making all or most of their payments. For a while the mortgage backed securities could not be valued, but they continued to exist. But then in 2011-12 conditions became more stable, particularly in the US housing market, as the massive spending on infrastructure by the federal government and the constant increase of the amount received by the American people in welfare and unemployment pay and the sluggish creation of new jobs worked together to increase confidence in the valuations of most US house property. Significant value could again be attributed to the securities from the 'nineties and the 'noughties that had been in limbo since the credit crunch. The Federal Reserve has now announced the continuance of its programme of taking such securities into the asset registers of the banks that are members of the Fed, in turn for new credit that is given to the banks to support their ongoing operations.

The short-term impact of this policy will be slightly to stimulate activity in the US economy, adding to business turnovers and employment. The major impact of the policy of 'Quantitative Easing' will be to increase the notional money supply; to convert the inflation of credit that had been confined to the housing sector to general credit within the banking system. The excess debt that was accumulated in the housing sector is being nationalised in the hands of the Fed, and a huge amount of spending-power is placed in general circulation. It will create inflation of general prices; and will stimulate modest economic growth. Without allowing any other major default of a bank to occur since Lehman's disappeared at the height of the crunch, the absurd sectoral credit expansion from the bubble era is being legitimated. This will be a phenomenal achievement, if it can be brought to completion. The objective is clear. In Britain the promised continuance of quantitative easing is not similarly targeted at 'monetising' the inflation of house prices that went so disastrously wrong through the sub-prime experiment; it is principally helping the banks to continue to meet their obligations from past casino banking, and secondarily allowing them to perform the statistical tricks that are needed to 'strengthen' their balance sheets to meet new global capital requirements. However long it goes on, it is unlikely to assist the growth of the real economy.